What is the best way to assess revenue diversification risk?

1 Define your revenue streams

The first step is to identify and categorize your revenue streams based on their source, type, and characteristics. For example, you can group them by product or service, market segment, geographic location, customer type, pricing model, or distribution channel. You can also classify them by their volatility, growth potential, profitability, or contribution margin. The goal is to have a clear picture of how your revenue is generated and distributed across different categories.

2 Analyze your revenue concentration

The next step is to measure how concentrated or diversified your revenue is within and across each category. You can use various metrics, such as the Herfindahl-Hirschman Index (HHI), the Gini coefficient, or the coefficient of variation, to quantify the degree of concentration or dispersion of your revenue streams. A high concentration means that a large portion of your revenue comes from a few sources or markets, while a low concentration means that your revenue is more evenly distributed among many sources or markets. A high concentration indicates a higher risk of revenue loss or decline if one or more of those sources or markets are affected by external factors, such as demand shocks, regulatory changes, or competitive threats.

3 Evaluate your revenue correlation

The third step is to assess how correlated or independent your revenue streams are from each other and from the overall market conditions. You can use statistical methods, such as correlation coefficients, covariance matrices, or factor analysis, to measure the strength and direction of the relationship between your revenue streams. A high correlation means that your revenue streams tend to move together in the same direction, while a low correlation means that they tend to move independently or in opposite directions. A high correlation implies a lower risk of revenue diversification, as it reduces the likelihood of simultaneous revenue drops or increases across different sources or markets. A low correlation implies a higher risk of revenue diversification, as it increases the uncertainty and variability of your revenue performance.

4 Compare your revenue diversification with your peers

The fourth step is to benchmark your revenue diversification against your competitors or industry peers. You can use public or proprietary data sources, such as financial reports, market research, or industry databases, to compare your revenue streams, concentration, and correlation with those of other players in your sector or market. This can help you identify your relative strengths and weaknesses, as well as potential opportunities and threats, in terms of revenue diversification. You can also use this information to set realistic and achievable goals for improving your revenue diversification.

5 Adjust your revenue diversification strategy

The final step is to review and adjust your revenue diversification strategy based on your assessment results and goals. You can use various tools, such as SWOT analysis, portfolio analysis, or scenario planning, to evaluate the feasibility and desirability of different revenue diversification options. You can also consider the costs and benefits, the risks and rewards, and the trade-offs and synergies of each option. The aim is to find the optimal balance between revenue diversification and risk, as well as between revenue stability and growth.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?